Exchange-Traded TBA Options

ABSTRACT

A computer-implemented method for creating an option on a TBA mortgage backed security, including determining an option position is marked to market daily, where the option position is long or short, determining the option position increased in value by an increased amount on a given day and adding the increased value to a customer&#39;s margin account, determining the option position decreased in value by a decreased amount on the given day and subtracting the decreased value from the customer&#39;s margin account, and when funds in the margin account are below a predetermined margin requirement, requesting the customer deposit additional funds in the margin account, receiving a request to exercise the option on the TBA mortgage backed security from a customer owning the option on the TBA mortgage backed security.

CROSS-REFERENCE TO RELATED APPLICATION

This application is a continuation in part of U.S. patent applicationSer. No. 15/619,035, filed Jun. 9, 2017, entitled “Exchange-Traded TBAOptions,” which claims the benefit of provisional application Ser. No.62/348,047, filed on Jun. 9, 2016, the entire contents of which arehereby incorporated by reference.

BACKGROUND

The “To Be Announced” (TBA) market is a market for forward commitmentsto buy and sell standardized mortgage backed securities (MBS). Themarket gets its name from the fact that the identity of the actualsecurities changing hands is not known until just before settlement. TheTBA market facilitates trading in fixed-rate MBS created under theauspices of the three agencies, with coupons in even 50 basis pointincrements (i.e., coupons of 4.0%, 4.5%, etc.) for multiple consecutivesettlement months. Monthly settlements take place on days designated bythe industry trade association.

The actual pools used to satisfy open TBA commitments are created priorto settlement and delivered against the open TBA commitment atsettlement. Two business days prior to settlement, the seller providesthe buyer with a list of the pools that will be delivered against theTBA commitment. The pools must meet the trade association'sspecifications for good delivery. These rules dictate the types of poolsthat can be delivered against a TBA commitment, how many pools can bedelivered (typically three pools per million dollars in face value), andthe “delivery variance” (i.e., the difference between the face value ofpools to be delivered and the TBA commitment size). The pools are thendelivered, versus a cash payment, by the seller to the buyer on thesettlement date. (See FIG. 1 for a schematic of the trade and settlementprocesses.) If the information is not conveyed by the cutoff time (3:00PM Eastern Time) or the information does not meet the tradeassociation's delivery rules, the buyer can refuse to accept delivery ofthe pools. This eventuality (“failing to deliver”) means that the sellermust hold the pools until delivery can be affected, incurring bothcapital outlays and expenses.

The fact that the TBA market allows trading to take place for multiplemonths' settlement facilitates transactions known as dollar rolls.Dollar rolls (or simply “rolls”) are trades where TBAs are bought (sold)for a particular month's settlement and simultaneously sold (bought) fora later settlement.

The TBA market is the primary vehicle for mortgage-backed securities(MBS) trading. Data from the Financial Institution Regulatory Authority(FINRA) indicates that TBA trades regularly constitute more than 90% ofall trading in MBS.

The structure of the TBA market reflects the needs of several marketsegments. Mortgage lenders can use TBA forward commitments to hedgetheir “pipelines” of loan applications that are in the process of beingunderwritten, while also monetizing their funded inventories bydelivering against their TBAs. Investors also utilize the TBA market tobuy and sell MBS pools. Investors” include a variety of marketparticipants that utilize TBA commitments, including money managers,hedge funds, and mortgage servicers. The market is facilitated byBroker/Dealers who act as intermediaries between various counterparties.In order to act as intermediaries, Broker/Dealers must 1) act as acounterparty for lenders and investors looking to buy or sell TBAs (aswell as actual pools); 2) accept and deliver pools to fulfil TBA forwardtrades; and 3) evaluate and manage counterparty credit risk. Thisrequires capital, trading and risk-management personnel, back-officestaffing, information and analytical technology, and banking facilities.

FIG. 2 shows a schematic showing the structure of the MBS market and thevarious participants. Broker/dealers act as market intermediaries. Theywill take the opposite side of trades from their clients, acting aseither an agent (i.e., risklessly) or as a principal (accepting marketrisk). Lenders typically receive pools from the agencies (Fannie Mae,Ginnie Mae, Freddie Mac) and deliver them to broker/dealers against TBAforward commitments. Lenders typically do not buy TBAs except to closeout open short positions; as a result, their inability to take deliveryof pools from any counterparty other than the agencies is limited.Investors buy or sell TBAs depending on their investment strategies andtactics, and often receive or deliver pools against TBA obligations.(They also have the option of closing out trades prior to settlement.)As part of the settlement process, broker/dealers receive pools fromsellers and re-deliver them to buyers. Acting as a broker/dealer forTBAs requires: Counterparty credit exposure and analysis; Staffing, ITinfrastructure, and banking facilities to accept and deliver pools tocounterparties; Capital and financing necessary to support a principaltrading operation and to fun positions resulting from “fails.”Counterparties (i.e., both lenders and investors) typically neverinteract directly with each other. Reasons include: Operations aresimplified by facing a limited number of counterparties; Counterpartycredit exposure is limited to a few large, well-capitalized andregulated entities.

The TBA market's structure makes the settlement process for MBS complexand expensive, and errors are common. The following compares thesettlement procedures for Treasury futures contracts (traded andsettlement through the CME Group) relative to the TBA market.

CBOT Treasury futures are settled by delivering eligible securitiesagainst trades for trades open at expiration of quarterly contracts.Eligible securities are delivered through the exchanges clearing bank.Trade prices are adjusted using “conversion factor” for the securitydelivered. Each contract has a “delivery basket” outlining thesecurities that can be delivered. For example, the 10-year note futureallows delivery of Treasuries with maturities between 6½ and 10-years.For the September 2017 10-year note contract, 16 issues were eligiblefor delivery. Delivery may occur on any day of the month the contractexpires, up to and including the last business day of the month. CMEClearing acts as counterparty on all open transactions, and isresponsible for managing client accounts, collecting margin, andmanaging credit exposure.

TBA forward commitment settlements take place monthly for all couponsand products according to a calendar published by SIFMA. The seller mustnotify the buyer of the identity and face value of pools to be deliveredagainst open obligations, subject to SIFMA delivery rules. Pools aredelivered subject to SIFMA rules that specify a) eligible productgroups; b) the maximum number of pools per million to be delivered (3);c) the maximum delivery variance (0.01%). Deliveries that do not meetthese rules are not accepted by the buyer and may result in “failing todelivery.” More than 37,000 pools can be delivered against Fannie Mae3.5% TBAs. In 2016 Fannie Mae issued 6,435 pools that are eligible fordelivery, with sizes ranging from $57,500 to $26.0 billion. Seller mustnotify buyer of pool IDs and face values no later than 48 hours prior tosettlement (3:00 PM Eastern Time on the assigned settlement date).Broker/dealers serve as counterparties against virtually all trades.They take delivery of pools from accounts selling to them and re-deliverthem against their sales, and must fund pools that cannot be deliveredby settlement. Broker/dealers also collect margin and managecounterparty credit exposure.

Mortgage lenders and MBS traders often find it convenient andcost-effective to trade options due to the intrinsic nature of theproducts. Mortgages are noteworthy for having “embedded” options thatreflect the borrowers' ability to refinance their loans if ratesdecline. In addition, mortgage lenders must deal with the possibilitythat loan applicants will either abandon their applications or negotiatelower mortgage rates if market interest rates decline between the timethat their loans' rate is set (or “locked”) and the time the loansclose. This is referenced as “fallout” and is another form of optionembedded in loan applications. Lenders monitor the expected fallout fromtheir pipeline by estimating a “Pull-Through Rate” which estimates theproportion of their pipeline that they expect to close. The Pull-ThroughRate for a loan is a function of the current level of mortgage rates(relative to the loan's rate) as well as the underwriting status of theloan. (If a loan is approved and an appraisal has been performed, forexample, the borrower is unlikely to seek a new loan irrespective of thelevel of mortgage rates.) The weighted average Pull-Through Rate foreach loan is the Pull-Through Rate for the total pipeline, whichdictates the size of the hedges that will be necessary to protect thepipeline's value.

Changes in expected Pull-Through Rates impact the interest rate riskassociated with lenders' pipelines. FIG. 3 contains a hypotheticalexample of how changes in market interest rates impact a pipeline'sPull-Through Rate and necessitates adjustments to the size of the hedge.As rates change, the pipeline effectively increases in size and risk asthe Pull-Through Rate increases; as rates fall, the pipeline's sizedecreases. This behavior means that the lender must re-size the hedgesas rates fluctuate in order to avoid being under- or over-hedged. Adecision tree illustrating a trader's thought process is shown in FIG.4. However, hedging with interest-rate options can offset the impact ofchanging Pull-Through Rates.

The risk exposures or “deltas” of options change based on changes inmarket conditions, allowing traders to structure hedges that mitigatemuch of their exposure to embedded options. Delta is a term thatindicates the sensitivity of an option's price relative to price changesin the underlying securities. FIG. 5 shows the profile of a hedgedpipeline if put options on Fannie 3.5% s are used as a hedging vehicle.As the table indicates, the lender does not need to actively manage thehedge; the hedge's risk exposure changes with the level of market rates,largely offsetting the impact of the embedded options.

While many MBS market participants can benefit from using options, thereare several factors that have prevented them from being widely utilized.Because of the complexities and costs associated with the settlementprocess, there is currently no exchange-traded market for TBA options.Exchanges do not have the same capital and operational structures asbroker/dealers, and are unable to absorb the costs, investment and risksassociated with allocating and clearing TBA transactions. For example,consider a case where Investor A was short 100 mm TBAs to the exchange,and the exchange was short 100 mm TBAs to Investor B. This is ostensiblya matched trade; however, if pool information is not conveyed on atimely basis to Investor B the exchange might not be able to re-deliverthe pools allocated to it by Investor A. As a result, the exchange wouldneed to both allocate capital and obtain financing in order to hold the100 mm in MBS. Alternatively, they cannot assign trades to theircounterparties (i.e., have their counterparties settle transactionsdirectly) in part because of counterparty credit exposures. As a result,TBA options are traded in an Over-The-Counter (OTC) market offered by asmall number of dealers. The market is generally viewed as opaque,expensive, and prone to manipulation, and has not grown or expandedsince the 1980s despite the expressed interest of many marketparticipants in utilizing options as a hedging and trading vehicle.

Mortgage and MBS traders seeking to utilize exchange-traded options arecurrently limited to options on Treasury futures. These are oftenunsatisfactory vehicles because a) the risk exposures of Treasuryfutures are different than those of mortgages and MBS; and b) Treasuryfutures and MBS prices often do not exhibit strong correlation. This“basis risk” is difficult to manage and creates a separate form ofexposure that many MBS market participants seek to avoid.

The inability and/or unwillingness of mortgage lenders to utilizeinterest rate options in their hedging directly impacts their financialperformance and, by implication, the mortgage rates they can offer totheir customers. If a TBA option existed that addressed the variousissues addressed previously, lenders could arguably hedge theirpipelines more efficiently and become more competitive in their rateofferings.

Option expirations cannot coincide with the TBA settlement calendar dueto the pool notification and delivery requirements associated with TBAs.The options must expire prior to the TBA notification date; there mustbe a lag between expiration and notification day in order to allow poolinformation to be exchanged prior to the notification deadline. Thiscreates a separate deadline for lenders and investors that requiresadditional attention and oversight.

SUMMARY OF THE INVENTION

A computer-implemented method for creating, centrally clearing, andsettling an option on a TBA mortgage-backed securities forward contractthrough a centralized trading platform and central clearinghouse thateliminates the need for delivering or exchanging the TBA mortgage-backedsecurities forward contract or any mortgage-backed securities uponexercise of the option, the method including: a. receiving at memoryfrom the centralized trading platform a request from a customer to buyor sell the option on the TBA mortgage-backed securities forwardcontract; b. using the computer processor in communication with memoryof the centralized trading platform, electronically automaticallydetermining that an offsetting order to sell or buy the option on theTBA mortgage-backed securities forward contract exists at the same pricefrom a different customer, then; b1) using the computer processor incommunication with the memory of the centralized trading platform,electronically automatically buying the option for the customer placingthe buy order from the customer placing the offsetting sell order andnotifying the customers buying and selling the option that the trade hasbeen executed; b2) using the computer processor in communication withthe memory of the centralized trading platform, electronicallyautomatically adding the option to the position account of the customerbuying the option; b3) using a computer processor in communication withthe memory of the centralized trading platform, electronicallyautomatically determining the total cost of the option purchased by thecustomer and, when funds in the margin account are below a predeterminedamount required to pay the cost of the option, requesting the customerdeposit additional funds in the margin account; b4) using the computerprocessor in communication with the memory of the centralized tradingplatform, electronically automatically subtracting the cost of theoption or options from the customer's margin account; b5) using thecomputer processor in communication with the memory of the centralizedtrading platform, electronically automatically determining that thecustomer that sold the option owned the option in the customer'sposition account, and reducing the option position in the customer'sposition account by the amount of the options sold and adding theproceeds of the sale, net of costs, to the margin account of thecustomer that sold the options; b6) using the computer processor incommunication with the memory of the centralized trading platform,electronically automatically determining that the customer that sold theoption or options did not own the option sold in the customer's positionaccount and creating in the customer's position account a short positionfor the amount of the options sold, and adding the proceeds of the saleof the option less any costs and less some predetermined amount ofmargin retained by the centralized trading platform and centralclearinghouse to the margin account of the customer that sold theoptions; c. using the computer processor in communication with memory ofthe centralized trading platform, electronically automaticallydetermining that an offsetting order on the same option does not existat the same price from a different customer on the centralized tradingplatform and posting the customer's order on the centralized system thatdisplays the order to the centralized trading platform's customers; c1)using the computer processor in communication with memory of thecentralized trading platform, electronically automatically determiningthat a new order to buy or sell the option posted by a differentcustomer represents an offsetting order on the option at the same price,and buying the option for the customer placing the buy order from thecustomer placing the sell order; and c2) using the computer processor incommunication with memory of the centralized trading platform,electronically automatically receiving at memory from the centralizedplatform instructions from the customer that placed the order to cancelthe order, and removing the order posted on the centralized orderdisplay system.

BRIEF DESCRIPTION OF THE DRAWINGS

The various embodiments of the present invention now will be discussedin detail with an emphasis on highlighting the advantageous features.These embodiments depict the novel and non-obvious aspects as shown inthe accompanying drawings, which are for illustrative purposes only.These drawings include the following figures, in which like numeralsindicate like parts:

FIG. 1 is a chart showing trade and settlement process for TBA Market.

FIG. 2 is a diagram outlining the structure and participants in the TBAMarket

FIG. 3 shows the impact of changing rates on a mortgage pipeline hedgedwith TBAs due to changes in the expected Pull-Through Rate.

FIG. 4 shows the decision tree of a trader when market rates change by0.30%.

FIG. 5 shows the impact of changing rates on a pipeline hedged with TBAoptions.

FIG. 6 compares the timelines of existing TBA options with theinvention.

FIG. 7 is a flowchart showing initial stages of actions undertaken by acomputer system to trade and manage proposed contracts according to anaspect of the invention of the present disclosure.

FIG. 8 is a flowchart showing actions undertaken by a computer system tomanage proposed contract between trade day and option expirationaccording to an aspect of the invention of the present disclosure.

FIG. 9 is a flowchart showing actions undertaken by a computer system tomanage proposed contract at time of option expiration according to anaspect of the invention of the present disclosure.

FIG. 10 is a functional block diagram of a general-purpose computingsystem on which the present embodiments may be implemented according tovarious aspects of the present disclosure.

DETAILED DESCRIPTION OF THE INVENTION

The following detailed description describes the present embodimentswith reference to the drawings. In the drawings, reference numbers labelelements of the present embodiments. These reference numbers arereproduced below in connection with the discussion of the correspondingdrawing features.

The embodiments of the invention of the present disclosure are describedbelow with reference to the figures. These figures, and their writtendescriptions, indicate that certain components of the apparatus areformed integrally, and certain other components are formed as separatepieces. Those of ordinary skill in the art will appreciate thatcomponents shown and described herein as being formed integrally may inalternative embodiments be formed as separate pieces. Those of ordinaryskill in the art will further appreciate that components shown anddescribed herein as being formed as separate pieces may in alternativeembodiments be formed integrally. Further, as used herein the termintegral describes a single unitary piece.

This application relates to exchange-traded option contracts onmortgage-backed security TBA agreements that settle in cash atexpiration. The Contract is for options on TBA commitments. Strikeprices could be offered either in one-point or half-point increments,depending on market conditions.

Contracts would be offered for actively-traded Fannie Mae coupons forthe three settlement months quoted on trading screens by vendors such asTradeWeb and Bloomberg. (These are always represented by the threesettlement months directly following any given trading session, asspecified by SIFMA's delivery calendar.) The contract would expire at3:00 PM Eastern time on the SIFMA-designated “notification day” for anygiven month.

Contracts would be traded for Call and Put options. The option contractswould be structured as American options, exercisable at any time priorto expiration.

Securities or other assets need not ever change hands at or prior toexpiration. The contracts would be settled for cash after expiration, asfollows: Sellers of Call contracts would pay the Call buyers either (a)the difference between the TBA price at expiration and the strike price,or (b) zero. Sellers of Put contracts would pay the Put buyers either(a) the difference between the strike price and the TBA price atexpiration, or (b) zero. Settlements would be handled by the exchange.

The proposed contracts would be different from traditional options thatgrant the right, but not the obligation, to buy or sell a designatedasset at a designated price prior to the contract's expiration.Depending on the type of option contract traded (i.e., call or put), theproposed contracts would pay out the difference between the price of theasset (i.e., TBA contracts) and the strike price after expiration.

For the purpose of settling contracts at expiration, TBA prices would bedetermined using prices published by a generally-acknowledged source ofmarket data.

Advantages and Benefits of Contract Structure

Avoiding the complex and difficult operational issues and expensesassociated with the TBA settlement process allows the contract to betraded on an exchange. This means that information on pricing, activity,and market size is published and readily available. This in turn isexpected to bring in more participants to the market, creating betterliquidity and more efficient pricing.

The presence of a transparent and liquid option contract would betterallow mortgage originators and investors to trade options as part oftheir overall hedging and investment strategies. Mortgage lenders thatutilize options in their hedging strategies can be expected to hedgetheir pipelines more effectively and at a lower cost, and such savingsmay be passed on to consumers in the form of lower mortgage lendingrates. It is expected that a liquid and transparent exchange-tradedproduct would also be viewed favorably by regulators, especially thoseoverseeing depository institutions.

The contracts are simple, straightforward and easily managed by lendersand investors.

Option expirations will coincide with the TBA settlement calendar. FIG.6 contains timelines comparing the timing of events in the OTC optionsmarket relative to those for the proposed contract. Note that theexisting TBA options products forces the option holder to either makedecisions or take actions at multiple different times after purchase. Bycontrast, the invention streamlines the process such that no decision oraction is required if the option is held to expiration; it eitherexpires worthless or is automatically exercised. This will allow lendersand investors to conveniently manage their option positions in concertwith the rest of their TBA positions and/or portfolios. Note also thatthe existing TBA options force the option expiration to take place priorto notification day, while for the invention the option expiration takesplace at the same time as notification.

FIGS. 7-9 are flowcharts showing a detailed description of the processesthat may be undertaken in connection with execution of the inventionwith the exchanges computer networks, systems and databases. It showsactivities that take place at three stages: At the time the option ispurchased in FIG. 7; the time between the option's purchase and itsexpiration (which are undertaken daily) in FIG. 8; and at expiration inFIG. 9.

FIG. 7 is a flowchart showing initial stages of actions undertaken by acomputer system to trade and manage proposed contracts. In Step 70:Customer seeking to trade TBA options sets up computer-managed marginand position accounts with the exchange and deposits cash in the marginaccount. In Step 71: Exchange receives an order from a customer tobuy/sell TBA option. In Step 72: Exchange's computers look foroffsetting orders to sell/buy TBA option at same price. If an offsettingorder is found, the trade is executed by the system, and both partiesare notified of the trade. In Step 73: If no offsetting order at thesame price exists, the order is posted on the computer-driven on-linetrading system. In Step 74: If order is executed, both parties arenotified electronically. In Step 75: The exchange's computer systemposts the trade on its notification database. In Step 76: Add trades tothe computerized accounts of both parties to trade. In Step 77: Exchangeelectronically transfers proceeds from TBA option buyer to seller.Exchange's computer systems ensure that sufficient funds are left inmargin account to meet margin requirements. In Step 78: If order is notexecuted, exchange waits until order is cancelled by customer orexpires. In Step 79: Remove order from on-line trading system.

FIG. 8 is a flowchart showing actions undertaken by a computer system tomanage proposed contract between trade day and option expiration. InStep 80: Option position (either long or short) is marked to marketdaily by exchange's computer system. In Step 81: If customer's accountmade a profit, exchange adds value of profit to margin account'sbalance. In Step 82: If customer's account lost money, exchange removesmoney from the customer's margin account; exchange also ensures thatavailable margin meets required amount. In Step 83: If customer long theoption requests that the option is exercised, the exchange's computersystem obtains the price of the associated TBA and calculates theoption's intrinsic value (i.e., the difference between the strike andmarket prices of the applicable TBAs). In Step 84: The exchangeelectronically transfers funds representing the intrinsic value fromaccounts that are short the same option. In Step 85(a): The option isremoved from the customers' positions. In Step 85(b): the exchangeautomatically notifies the customer short the option of the exercise. InStep 85(c): Exchange's computer system finalizes proceeds in marginaccounts. In Step 86: If the option is not exercised, the exchange doesnothing.

FIG. 9 is a flowchart showing actions undertaken by a computer system tomanage proposed contract at time of option expiration. In Step 90:Option position is held on exchange's computerized account system atcurrent market price. In Step 91: Exchange electronically obtains thepricing of TBA from pricing source and calculates intrinsic value. InStep 92(a) and (b): Exchange marks option price to zero and removes frompositions. In Step 93: If option is in-the-money, exchangeelectronically transfers money representing intrinsic value to customersfrom customers that are short the same option. In Step 94(a) and (b):Exchange's computer system finalizes proceeds in margin accounts.

FIG. 10 is a functional block diagram of a general-purpose computingsystem on which the present embodiments may be implemented according tovarious aspects of the present disclosure. The computer system 900 maybe embodied in at least one of a personal computer (also referred to asa desktop computer) 900A, a portable computer (also referred to as alaptop or notebook computer) 900B, and/or a server 900C. A server is acomputer program and/or a machine that waits for requests from othermachines or software (clients) and responds to them. A server typicallyprocesses data. The purpose of a server is to share data and/or hardwareand/or software resources among clients. This architecture is called theclient-server model. The clients may run on the same computer or mayconnect to the server over a network. Examples of computing serversinclude database servers, file servers, mail servers, print servers, webservers, game servers, and application servers. The term server may beconstrued broadly to include any computerized process that shares aresource to one or more client processes.

The computer system 900 may execute at least some of the operationsdescribed above. The computer system 900 may include at least oneprocessor 910, memory 920, at least one storage device 930, andinput/output (I/O) devices 940. Some or all of the components 910, 920,930, 940 may be interconnected via a system bus 950. The processor 910may be single- or multi-threaded and may have one or more cores. Theprocessor 910 may execute instructions, such as those stored in thememory 920 and/or in the storage device 930. Information may be receivedand output using one or more I/O devices 940.

The memory 920 may store information, and may be a computer-readablemedium, such as volatile or non-volatile memory. The storage device(s)930 may provide storage for the system 900, and may be acomputer-readable medium. In various aspects, the storage device(s) 930may be a flash memory device, a hard disk device, an optical diskdevice, a tape device, or any other type of storage device.

The I/O devices 940 may provide input/output operations for the system900. The I/O devices 940 may include a keyboard, a pointing device,and/or a microphone. The I/O devices 940 may further include a displayunit for displaying graphical user interfaces, a speaker, and/or aprinter. External data may be stored in one or more accessible externaldatabases 960.

The features of the present embodiments described herein may beimplemented in digital electronic circuitry, and/or in computerhardware, firmware, software, and/or in combinations thereof. Featuresof the present embodiments may be implemented in a computer programproduct tangibly embodied in an information carrier, such as amachine-readable storage device, and/or in a propagated signal, forexecution by a programmable processor. Embodiments of the present methodsteps may be performed by a programmable processor executing a programof instructions to perform functions of the described implementations byoperating on input data and generating output.

The features of the present embodiments described herein may beimplemented in one or more computer programs that are executable on aprogrammable system including at least one programmable processorcoupled to receive data and/or instructions from, and to transmit dataand/or instructions to, a data storage system, at least one inputdevice, and at least one output device. A computer program may include aset of instructions that may be used, directly or indirectly, in acomputer to perform a certain activity or bring about a certain result.A computer program may be written in any form of programming language,including compiled or interpreted languages, and it may be deployed inany form, including as a stand-alone program or as a module, component,subroutine, or other unit suitable for use in a computing environment.

Suitable processors for the execution of a program of instructions mayinclude, for example, both general and special purpose processors,and/or the sole processor or one of multiple processors of any kind ofcomputer. Generally, a processor may receive instructions and/or datafrom a read only memory (ROM), or a random access memory (RAM), or both.Such a computer may include a processor for executing instructions andone or more memories for storing instructions and/or data.

Generally, a computer may also include, or be operatively coupled tocommunicate with, one or more mass storage devices for storing datafiles. Such devices include magnetic disks, such as internal hard disksand/or removable disks, magneto-optical disks, and/or optical disks.Storage devices suitable for tangibly embodying computer programinstructions and/or data may include all forms of non-volatile memory,including for example semiconductor memory devices, such as EPROM,EEPROM, and flash memory devices, magnetic disks such as internal harddisks and removable disks, magneto-optical disks, and CD-ROM and DVD-ROMdisks. The processor and the memory may be supplemented by, orincorporated in, one or more ASICs (application-specific integratedcircuits).

To provide for interaction with a user, the features of the presentembodiments may be implemented on a computer having a display device,such as an LCD (liquid crystal display) monitor, for displayinginformation to the user. The computer may further include a keyboard, apointing device, such as a mouse or a trackball, and/or a touchscreen bywhich the user may provide input to the computer.

The features of the present embodiments may be implemented in a computersystem that includes a back-end component, such as a data server, and/orthat includes a middleware component, such as an application server oran Internet server, and/or that includes a front-end component, such asa client computer having a graphical user interface (GUI) and/or anInternet browser, or any combination of these. The components of thesystem may be connected by any form or medium of digital datacommunication, such as a communication network. Examples ofcommunication networks may include, for example, a LAN (local areanetwork), a WAN (wide area network), and/or the computers and networksforming the Internet.

The computer system may include clients and servers. A client and servermay be remote from each other and interact through a network, such asthose described herein. The relationship of client and server may ariseby virtue of computer programs running on the respective computers andhaving a client-server relationship to each other.

The above description presents the best mode contemplated for carryingout the present embodiments, and of the manner and process of practicingthem, in such full, clear, concise, and exact terms as to enable anyperson skilled in the art to which they pertain to practice theseembodiments. The present embodiments are, however, susceptible tomodifications and alternate constructions from those discussed abovethat are fully equivalent. Consequently, the present invention is notlimited to the particular embodiments disclosed. On the contrary, thepresent invention covers all modifications and alternate constructionscoming within the spirit and scope of the present disclosure. Forexample, the steps in the processes described herein need not beperformed in the same order as they have been presented, and may beperformed in any order(s). Further, steps that have been presented asbeing performed separately may in alternative embodiments be performedconcurrently. Likewise, steps that have been presented as beingperformed concurrently may in alternative embodiments be performedseparately.

What is claimed is: 1-3. (canceled)
 4. A computer-implemented method forcreating, centrally clearing, and settling an option on a TBAmortgage-backed securities forward contract (“TBA option”) through acentralized trading platform and central clearinghouse that eliminatesthe need for delivering or exchanging the TBA mortgage-backed securitiesforward contract referenced by the TBA option or any mortgage-backedsecurities upon exercise of the option, the method comprising: a) usinga computer processor in communication with the memory of the centralizedtrading platform, electronically automatically storing long and shortpositions in the TBA option at a current market price as determined atthe end of each trading session from price quotes input by a marketparticipant offering to buy the TBA option and a market participantoffering to sell the TBA option via a market participant graphical userinterface in communication with the memory of the centralized tradingplatform and provided by the centralized trading platform and posted onthe centralized trading platform; b) using a computer processor incommunication with the memory of the centralized trading platform,electronically automatically determining that long and short positionsin the TBA option will not expire that day; c) using the computerprocessor in communication with memory of the centralized tradingplatform, electronically automatically determining a TBA option positionis marked to market daily, where the TBA option position is long orshort; d) using the computer processor in communication with memory ofthe centralized trading platform, electronically automaticallydetermining the TBA option position increased in value by a given amounton a given day and adding the increased value to the customer's marginaccount; e) using the computer processor in communication with memory ofthe centralized trading platform, electronically automaticallydetermining the TBA option position decreased in value by a given amounton a given day and subtracting the decreased value from the customer'smargin account, and when funds in the margin account are below apredetermined margin requirement, requesting through an electronicallyautomated notification system that the customer deposit additional fundsin the margin account; f) upon receiving at memory of the electronictrading platform a request to exercise the TBA option from a customerlong the TBA option through an account management graphical userinterface; f1) using the computer processor memory in communication withan external pricing source connected through a network, obtaining andstoring a current price for the TBA mortgage-backed securities forwardcontract referenced by the TBA option from an external pricing source;f2) using the computer processor in communication with the memory of thecentralized trading platform, electronically automatically calculatingan intrinsic value of the TBA option based on the current price of theTBA mortgage-backed securities forward contract referenced by the TBAoption and the exercise price associated with the TBA option; f3) usingthe computer processor in communication with the memory of thecentralized trading platform, electronically automatically adjustingmargin accounts of the customers long and short the exercised TBA optionby reducing the mark to market value of the TBA option to zero; f4)using the computer processor in communication with the memory of thecentralized trading platform, electronically automatically transferringmoney representing the intrinsic value of the TBA option, less anyassociated costs, to the margin account of the customer long theexercised TBA option directly from the margin account of a customershort the exercised TBA option when the intrinsic value of the TBAoption is greater than zero; f5) using the computer processor incommunication with the memory of the centralized trading platform,electronically automatically removing the TBA option position from theposition accounts of the customer long the exercised TBA option and thecustomer short the exercised TBA option; f6) using a computer processorin communication with the memory of the centralized trading platform,electronically automatically notifying the customer short the TBA optionof the request to exercise the TBA option by the customer long the TBAoption and the price of the TBA mortgage-backed securities forwardcontract used to calculate the intrinsic value, electronicallyautomatically finalizing proceeds in the margin account of the customerlong the TBA option and the margin account of the customer short the TBAoption, and notifying customers of the changes to the proceeds in themargin accounts and the updated proceeds in the margin account.
 5. Acomputer-implemented method for creating, centrally clearing, andsettling an option on a TBA mortgage-backed securities forward contract(“TBA option”) through a centralized trading platform and centralclearinghouse that eliminates the need for delivering or exchanging theTBA mortgage-backed securities forward contract referenced by the TBAoption or any mortgage-backed securities upon exercise of the option,the method comprising: a) using a computer processor in communicationwith the memory of the centralized trading platform, electronicallyautomatically storing long and short positions in the TBA option at acurrent market price as determined at the end of each trading sessionfrom price quotes input by a market participant offering to buy the TBAoption and a market participant offering to sell the TBA option via amarket participant graphical user interface in communication with thememory of the centralized trading platform and provided by thecentralized trading platform and posted on the centralized tradingplatform; b) using a computer processor in communication with the memoryof the centralized trading platform, electronically automaticallydetermining that the TBA option will expire that day; c) using acomputer processor in communication with the memory of the centralizedtrading platform, electronically automatically obtaining and storing theprice of the TBA mortgage-backed securities forward contract referencedby the TBA option at the close of that day's trading from a pricingsource connected through a network; d) using a computer processor incommunication with the memory of the centralized trading platform,electronically automatically calculating an intrinsic value of the TBAoption based on that day's closing price of the TBA mortgage-backedsecurities forward contract referenced by the TBA option and theexercise price associated with the TBA option and determining the TBAoption has an intrinsic value greater than zero, then d1) using acomputer processor in communication with the memory of the centralizedtrading platform, electronically automatically marking the TBA optionposition in the margin accounts of the customer long the TBA option andthe customer short the TBA option to a market price of zero and removingthe TBA option from the position accounts of the customer long the TBAoption and the customer short the TBA option; d2) using a computerprocessor in communication with the memory of the centralized tradingplatform, electronically automatically transferring money representingthe intrinsic value of the TBA option, less any associated costs, to themargin account of the customer long the TBA option directly from themargin account of a customer short the TBA option and electronicallyautomatically notifying the customers long and short the TBA option ofthe money transfer and the price of the TBA mortgage-backed securitiesforward contract used to calculate the intrinsic value; d3) using acomputer processor in communication with the memory of the centralizedtrading platform, electronically automatically finalizing proceeds inthe margin accounts of the customer long the TBA option and the customershort the TBA option and electronically automatically notifying thecustomers long and short the TBA option of the updated final proceeds inthe margin accounts; e) using a computer processor in communication withthe memory of the centralized trading platform, electronicallyautomatically calculating an intrinsic value of the TBA option based onthat day's closing price of the TBA mortgage-backed securities forwardcontract referenced by the TBA option and the exercise price associatedwith the TBA option and determining the TBA option has an intrinsicvalue less than or equal to zero, then e1) using a computer processor incommunication with the memory of the centralized trading platform,electronically automatically adjusting the margin accounts of thecustomer long the TBA option and the customer short the TBA option bymarking the TBA option position to a market price of zero and removingthe TBA option from the position accounts of the customer long the TBAoption and the customer short the TBA option; and e2) using a computerprocessor in communication with the memory of the centralized tradingplatform, electronically automatically finalizing proceeds in the marginaccounts of the customer long the TBA option and the customer short theTBA option and electronically automatically notifying the customers longand short the TBA option that the TBA option had an intrinsic value lessthan or equal to zero and the price of the TBA mortgage-backedsecurities forward contract used to calculate the intrinsic value and ofthe updated final proceeds in the margin accounts.